Pages: 37

This chapter is an introduction to public financial management. It explains the three objectives of public financial management and the four stages or phases of the public financial management cycle. It also defines what is meant by public money and where it comes from. In this edition, Chapter 1 also includes more on what money is and introduces some ideas from modern monetary theory as a counterpoint to the classical idea that governments have to impose taxes first and spend later. The chapter includes some discussion of the new public management and public value management paradigms. It finishes with setting out how financial management in the public sector differs from the private sector and with identifying some of the challenges facing financial managers in the public sector. This new edition was written after the coronavirus pandemic and uses the pandemic to illustrate how important it is for governments to have effective public financial management arrangements in order to protect and serve their citizens.

Pages: 48

This chapter explains what budgeting is in general terms and gives evidence for the case that budgeting is a much more significant activity in public sector organizations than private sector ones. This is partly because the resources are limited (there is a limit on how much tax a government can impose). It is also because the budgeting process is where politicians determine which public services will be delivered to their constituents. Budgeting is also one way that public organizations are accountable to the public, namely, by showing the public what they will receive in return for the taxes that they pay. The main approaches to budgeting, incremental, zero-based and performance-based (which itself includes many sub-approaches), are explained with examples of their advantages and disadvantages. National governments and other public bodies are moving towards performance-based budgeting because of its inherent focus on improving results, but it is difficult to implement and it has several weaknesses. In difficult times they are also likely to return to incremental budgeting.

Pages: 48

Public services have to be paid for and, on the whole, the funds come from taxes, although there are other sources of income, including user charges, grants, asset sales, fines, investment income and borrowing. The four types of taxes—income, consumption, wealth and poll—are explained with examples. The characteristics of taxes in terms of their equity, efficiency, buoyancy, simplicity and feasibility are outlined along with an explanation of what is meant by progressive, flat-rate and regressive taxation. In this third edition, the section on borrowing in this chapter has been clarified and, as in Chapter 1, ideas from modern monetary theory have been incorporated into the text. Less emphasis is placed on the practicalities of collecting income.

Pages: 42

This chapter explains the concept of internal control and why it is important for public managers to appreciate the importance of the whole system of internal controls. This chapter focuses on budgetary control because it is one of the fundamental controls in any organization. Some practical tips on how to interpret budgetary control reports are given, and a section is included on managing financial risks. In this third edition, the title of this chapter was changed from controlling expenditure to making explicit how the concepts of control fit into the public financial management cycle that was introduced in Chapter 1. The common stages of the budget execution process are also explicitly included in the chapter. Similarly, sections relating to cash flow management, including the treasury single account and cash collection, are grouped together for clarity.

Pages: 27

This is the second of three chapters that are part of the budget execution phase of the public financial management cycle. It is based on the premise that the role of managers is to make decisions, and it is difficult to conceive of decisions that do not have a financial component. Specifically, the chapter first looks at how costs differ from expenses and how they can be categorized. This chapter explains key elements of terminology, including what is meant by fixed and variable costs, direct and indirect costs and cost structure. It also explains that an opportunity cost is not a cost. An explanation of traditional costing is given, and a brief section on activity-based costing is provided, including why the latter has been rejected by some organizations. The second half of the chapter deals with project appraisal techniques. It explains two methods: the payback method for simple projects and the net present value method for more complicated projects where the time value of money needs to be taken into account.

Pages: 37

Approximately 30 per cent of government money is spent on buying goods, works and services from private sector suppliers. This fact is clearly too significant to ignore in a textbook about managing public money. In this third edition, the title of this chapter has been changed to reflect the fact that the focus is placed on a more general view of public procurement rather than on partnerships. Stress is given to the process of procuring goods, works and services and then effectively managing the subsequent contracts. This chapter is structured to follow the standard timeline of commissioning, procurement, contract management and contract exit with the aim is to make it easier for readers to be able to apply the ideas in this chapter to the acquisition of goods and services in their (public sector) jobs.

Pages: 39

This chapter covers basic concepts of performance measurement and includes links with the notion of performance budgeting found in Chapter 2. There is also an explanation of the dysfunctional effect that target-setting can have on an organization’s actual performance. The structure of the chapter has been changed. Now there are separate sections on measuring performance, measuring public value and measuring value for money as well as a final section focusing on cost-benefit and cost-effectiveness analyses. This last of these sections includes more on monetizing intangible costs and benefits, including alternative ways that for putting a financial value on a (statistical) life. Also new in this third edition, a direct link is given to the costs and benefits of achieving the Sustainable Development Goals of the United Nations.

Pages: 53

Accountability is an important issue in public service, with the public demanding high levels of accountability about the use of public money. The first part of this chapter outlines key concepts relating to accountability and makes connections with transparency and ethics. In this third edition, the introduction to bookkeeping and accounting has been relocated to this chapter from Chapter 1. This makes it clearer, and less repetitive, by flowing directly from the basics of accounting to the characteristics of public sector accounting and then onwards to accounting standards and public sector financial reporting. The section on the various financial statements produced by public sector organizations now includes commentary on what those statements tell the reader and what they do not or cannot tell the reader.

Pages: 31

This is the final chapter of the book and fits into the budget evaluation stage of the public financial management cycle. It explains what audit is by describing what auditors do, and it includes more on different types of audits, audit risk assessment and audit testing. Separate sections are included for the external and internal audit of public sector organizations that include references to relevant professional standards and codes of practice. In this third edition, material about the history of public audit that was UK-centric has been removed. There is a new section specifically considering audit issues relating to government responses to the coronavirus pandemic in 2020/1.